Pay Cuts, but Little Headway on Larger Goals

And then the country’s pay czar descended from the mountaintop, or at least from his Washington law office, and handed down his rulings. And for his 175 subjects — er, I mean the 25 most highly paid executives at the seven big companies that still hold billions of dollars in government assistance — his rulings were painful.

You’ve heard the details. The pay czar slashed cash compensation. He insisted that stock compensation be held for two to four years.

Guaranteed bonuses? Gone. Retention bonuses? Eliminated. Pay tied to performance? In. “The strategic construct is that their compensation should be tied to the performance of the company,” the pay czar, Kenneth R. Feinberg, said in an interview Thursday.

On the face of it, this all sounds quite reasonable. Clearly, Mr. Feinberg tried hard to balance the desire among angry taxpayers to see pay curbed at the companies they had to save last year, and the executives’ wish to retain talent and pay competitive salaries. (Not to mention the government’s desire to get back the billions of dollars that were used to bail out these companies.) For this narrow goal, he largely succeeded.

But there was always a loftier goal for Mr. Feinberg. When he first took this thankless assignment from the Treasury Department in June, the hope was that when he made his rulings, he would help change the ethos of executive pay, not just at the seven companies that came under his purview, but all across Wall Street and, for that matter, across corporate America. When asked by a CNBC reporter on Thursday whether he believed the pay structure he established would lead to changes across Wall Street, he replied, “I hope so.”

But the truth is, it won’t. No pay czar can do that. That’s something only shareholders can do.

In the first place, Mr. Feinberg’s “strategic construct” differs only in degree from pay policies that already exist on Wall Street. Last year, Morgan Stanley overhauled its compensation plan to give the top executives 65 percent of their pay in stock — and much of that deferred. What’s more, Morgan Stanley employees have to defer a chunk of their cash compensation, so that it can be clawed back if the deals they have made go sour. Over at Goldman Sachs — where compensation practices aren’t exactly being heaped in praise these days — partners made no more than $220,000 in cash last year and the rest in stock. And the firm’s partners have to hold onto 75 percent of their stock until they retire.

In other words, much of Wall Street has already moved to better align pay with longer-term performance. Firms have decreased the cash component, and increased stock awards, with strings attached that force them to hold the stock for long periods of time. But that isn’t exactly keeping pay down, which — and let’s be honest here — is what most of the country really wants to see, given how the nation’s bankers helped put us at the brink of financial ruin.

The executives affected by Mr. Feinberg’s ruling aren’t exactly going broke either. For instance, when you add up both the cash and stock components, 14 of Citigroup’s highest-paid executives still stand to make $5 million to $9 million each. And if the company eventually recovers, pays back the bailout money, and sees its stock rise, Mr. Feinberg’s decision to put so much of compensation into stock is going to create huge windfalls for them.

Also, it’s worth noting that certain contentious pay issues were either ignored or shoved under the rug. Ken Lewis, the soon-to-be-retired chief executive of Bank of America, has declined to take a salary in 2009, at Mr. Feinberg’s urging. But he is still going to get around $70 million in retirement pay — which Mr. Feinberg could do nothing about. And so Mr. Lewis will soon join the ranks of other top Wall Street executives who walked away with millions after doing a miserable job. That’s the kind of pay practice that makes people justifiably angry.

And the American International Group is contractually obliged to make bonus payments of nearly $200 million in March 2010. The company has promised to try to reduce that amount by 30 percent. But once again, there is nothing Mr. Feinberg can do because those bonuses were already written into contracts — and there is a high likelihood that the bonuses will create another furor in Congress, just as they did earlier this year.

Ira Kay, who heads the executive compensation practice at the consulting firm Watson Wyatt, said that in purely economic terms, he believed Mr. Feinberg’s rulings wouldn’t make much difference in the way companies paid their top brass. If anything, it gave banks that have already given back all their bailout money an advantage in hiring people from the likes of Citi, Bank of America and A.I.G., which remain government wards.

But Mr. Kay did think that all the publicity surrounding Mr. Feinberg’s rulings would add to the general message that the country is unhappy with the excesses of executive pay. And boards of directors, he added, were getting that message. The more publicity surrounding executive compensation issues, he said, the more board members are motivated to pare back things like “gross ups” and other excesses.

Nell Minow, the co-founder of the Corporate Library and a fierce proponent of executive compensation reform, didn’t even think that was particularly likely. “The only way you’re going to change things is to throw the bums out,” she said caustically.

The “bums” she had in mind, of course, were corporate directors, especially the ones who sat on the compensation committees. Right now, it seems likely that Congress will pass a “say on pay” bill, giving shareholders the right to vote thumbs-up or thumbs-down on executive pay. (It has already passed in the House of Representatives.) But that is just a starting point, since, after all, say-on-pay would be only an advisory vote, and wouldn’t be binding on the board.

Instead, Ms. Minow believes that shareholders need the ability to vote directors off the board if they feel they are doing a bad job — on executive pay or anything else. Right now, the deck is so stacked that is nearly impossible, especially since many companies don’t allow simple, majority votes to elect (or reject) directors. But the most straightforward way to shrink the oversize pay of Wall Street executives — and, more generally, curb the excesses of executive pay — would be to make directors more accountable to the company’s shareholders.

As well-meaning as Mr. Feinberg is, and as diligently as he worked through his assigned task, he shouldn’t be the pay czar. No one person should be. That’s a job more properly reserved for shareholders. You know, the ones who own the company.

A version of this article appears in print on October 23, 2009, on page B1 of the New York edition with the headline: Pay Cuts, but Little Headway in What Matters Most. Order Reprints|Today's Paper|Subscribe